Recession? Raising Cash & Your Stock Picks

"The stock market is where the impatient give their money to the patient" — Warren Buffet

​​The Portfolio Performance

The portfolio is UP +17.16% YTD

The S&P 500 is UP +23.11% YTD

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What Happened?

Today was one of those days that can take your breath away. The S&P 500 was down -178 points, the DOW declined -1,123 points, and the NASDAQ lost -716 points.  So, how do we keep this in perspective?

First, today’s move in the market was 100% predictable.  We don’t get many predictable days, but this one was screaming inside my crystal ball.  Some of those screams sounded like this.

• The stock market is overvalued by about 200%, so any selling should be welcomed and considered healthy. However, even if I add the Federal Reserve’s balance sheet, the market is still overvalued by 160%.

• The economy is doing well. GDP was up 2.8% in the third quarter, and the fourth-quarter estimate is 3.1%. 

• The S&P 500 is up +23% YTD, and the tech-heavy NASDAQ is up +29%.

• The U.S. economy added 227,000 jobs in November 2024, surpassing expectations and staging a robust rebound from the previous month. Notably, job gains for October were revised upward to 36,000 from 12,000, and September’s gains were adjusted to 255,000 from 223,000.

• Average hourly earnings increased by 4% year-over-year, which could support consumer purchasing power and confidence.

• World oil demand growth is set to accelerate from 840 kb/d in 2024 to 1.1 mb/d next year, lifting consumption to 103.9 mb/d in 2025. 

• J.P. Morgan Commodities Research forecasts Brent could average $80/bbl in the fourth quarter of 2024 (which hasn’t happened) and $75/bbl in 2025, declining to the low $60s by the end of 2025. Low oil prices suggest low demand or excess supply. Either way, low oil prices are on the horizon.

• Finally, take a breath. Today’s sell-off is only 3.6% below the year-to-date peak of 6,090. However, 10% declines are common in any given year.

Looking back to when the Fed raised interest rates at the fastest pace in history, the economy was hot and at risk of overheating.  Inflation was raging because supply chains were disrupted, more people were working and earning higher wages, and the Federal government flooded the economy with money that exacerbated the situation.  Raising short-term rates slows the economy by reducing borrowing and preventing consumers from making major purchases like homes and cars.  All my points above indicate a robust, strong economy that doesn't need lower rates. So, what is the Fed doing?  I think they’re trying to get ahead of a growing problem that’s lurking below the surface.  Read that as ‘not making the headlines’ while everyone is focused on a stock market that won’t stop going up.

Two data points make me think the Fed is worried about a recession.

First is the Leading Economic Index (LEI).  The LEI provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term.  The LEI for the US declined by 0.4% in October 2024 to 99.5 (2016=100), following a 0.3% decline in September (revised up from a 0.5% decline). Over the six months between April and October 2024, the LEI fell by 2.2%, slightly more than its 2.0% decline over the previous six-month period (October 2023 to April 2024).  Manufacturing for new orders had the most significant impact on the LEI.  Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board, said, “In October, manufacturing hours worked fell by the most since December 2023, while unemployment insurance claims rose and building permits declined, partly reflecting the impact of hurricanes in the Southeast US. Additionally, the negative yield spread continued to weigh on the LEI. Apart from possible temporary impacts of hurricanes, the US LEI continued to suggest challenges to economic activity ahead. “

The second data point is the Sahm Rule, which has predicted every recession for the past 50 years. This Recession Indicator signals the start of a recession in real-time when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.  The Sahm Rule was triggered in August when the three-month average rose from .20 in January to .57 in August 2024.  The three-month average was 3.6% a year ago, so a jobless rate of 4.1% would trigger the Sahm Rule.  We hit 4.1% in June 2024, 4.3% in July, 4.1% in September and October, and increased to 4.2% in November.  But this business cycle is strange and complicated, so what does Claudia Sahm have to say?

The US is not in a recession, despite the Sahm Rule indicator bearing my name saying it is. That said, the risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates, said economist Claudia Sahm.

Claudia Sahm is urging the Fed to get ahead of the economy by cutting rates early enough to have a near-term impact.  Because it takes so long for interest rate changes to filter through the economy, I think Ms. Sahm is correct in calling for rate cuts.

We Raised Cash

On Monday, I raised cash by selling 17 positions ahead of Fed Chair Powell’s speech today.  As I said, the stock market's reaction was predictable, hence my rush to raise a lot of cash.  Now is the time to focus on our research to determine where to put all that cash to work.

I recommend that every investor own an S&P 500 index fund as a starting point. The State Street SPDR S&P 500 symbol (SPY) is an excellent choice, and the Vanguard S&P 500 symbol (VOO) is another excellent ETF. I wouldn’t put new money into these funds right now, but I would certainly watch for a decline in the 50-day and 200-day moving averages as a place to start or add to an existing position. This staple of investing is riskier today than a decade ago, mainly because of the overweight positions of five companies. However, I recommend that everyone own an index fund first and then add individual stocks.

Watch the ACTIONS column of the portfolio for my notes.  BULLPEN means I’m watching the stock.  Dollar values like ($28-$37) in this column indicate price targets I’m looking for to make a buy or a sell.  AVERAGE DOWN is a note that I want to add shares at lower prices to reduce the cost basis.  BUILD OR KILL is a note that the position is too small, and I either need to build it larger or close the position and move on.  When I hold a small position, it usually indicates my confidence is low.  Until I have information that makes me more confident, I’m happy to be wrong holding cash.

Please Ask Questions

Please ask questions in the comments section at the bottom of any post. Private emails will be answered but won’t help our other subscribers. I will respond to every comment regardless of how you send it. Please remember that asking questions or seeking clarification may help another subscriber. If I don’t know the answer to your question, I’ll tell you I don’t know, but I’ll find out. 

As I consider whether to continue writing this blog in 2025, I’m thinking about two major themes for the blog:

• I want to spend more time explaining my research process and how I select companies to invest in and less about commenting on the markets.  It’s a ‘learn to fish’ approach versus ‘here’s a fish.’

• I would also love to respond to my subscribers' stock picks. Use the Contact page to send your stock ideas. Include any thesis you have, and I’ll write a blog post about my view of the company and prospects for the stock.  I’ll keep your name confidential in my posts.

"Markets don't go to zero; portfolios do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker

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Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't; Stay Invested

Rule #4: When good stocks you own drop 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your homework.

RULE #10: Don't expect a company's stock to perform according to your timeline; be patient.

Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.

Rule #12: It's hard to be incredibly intelligent. Not being stupid is pretty easy.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security.

I am invested short in these securities mentioned in this post:

None mentioned

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or be interpreted as providing a personal recommendation. This and all articles on this website are provided for entertainment purposes only. Investing involves risk and risk of loss of part or all of your capital. Invest wisely, make your own decisions, seek advice from multiple sources.